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Beyond the Signature Block: Analyze the Exhibits Attached to a Lease
In reviewing a draft of another party's form commercial retail lease, much time and effort is expended in analyzing the lease relative to the agreed-upon letter of intent and/or applying a client's leasing parameters into the lease. Many times the signature block is viewed as the proverbial 'goal line,' so if you can make it to the signature block, you are at the conclusion of your review; however, to review the form lease adequately and completely, one must continue the review and analyze all the exhibits attached to the form lease.
There are almost an infinite number of exhibits that one could attach to a lease form; but there are certain exhibits that are more common than others in a commercial real estate context. Among the many types of exhibits that are or could be attached to a commercial retail lease form, the following list is representative of those exhibits that most would agree to be necessary:
1) Legal description;
2) Site Plan;
3) Landlord and Tenant Work Let-ter; and
4) Memorandum of Lease
The question one needs to consider is whether or not the exhibits to the lease supplement the lease or potentially modify the terms and conditions of the lease? In part, the answer to this question will ultimately be of value during the term of the lease when the lease terms and conditions are being administered.
The following is a discussion of the above-referenced exhibits that need to be analyzed as part of a thorough and comprehensive review of a form lease.
Legal Description
Attaching the legal description of the property and/or shopping center is important in a number of significant ways. The legal description of the property is useful to identify the property with certainty because no two parcels of land are ever the same. Additionally, the legal description is effective to verify the landlord's ownership of the property. Moreover, the legal description can be used as a subsequent attachment for the memorandum of the lease, and is relevant as a lender requirement for the tenant's financing of the leasehold interest in the property. In reviewing the legal description, determine if it is ex-pressed in a metes and bounds description or as part of a recorded plat map. Notwithstanding how the legal description is expressed, one should request verification of it from the party that prepared the lease form. This verification can be accomplished by comparing the description to a warranty deed or title report provided by the landlord. The wrong legal description ' or a lease form that does not include the legal description ' can contribute to a host of time-consuming problems in administering the lease.
Site Plan
The site plan is the visual 'road map' of the property and/or shopping center. The site plan will identify the boundaries of the property, locate the specific premises, and identify such items that may be referenced in the lease such as no-build areas, protected drive aisles, outdoor seating areas, drive-through lanes, dumpster/trash locations, relocation areas, co-tenancy areas, visibility corridors, and supplemental exterior signs such as monument and pylon signs. During the examination of the lease, it would be useful to highlight such references in the lease that are shown on the site plan and confirm that such items are in fact clearly and adequately labeled and/or identified on the site plan.
Work Letters
Work letters are perhaps one of the most significant exhibits that can have a direct and economic effect on the value of the leasehold asset and in administering the lease. When reviewing a work letter some procedural questions to ask include, but are not limited to:
1) Who prepares the initial drawings for the construction of the improvements?
2) What are the time periods for reviewing and preparing comments to the construction drawings?
3) What type of specifications do the drawings need to include, eg, the size scale to be used and sample boards of materials and colors?
4) Is there a penalty ' economic or otherwise ' for late delivery of the drawings? (For example, a monetary penalty of $500 per day for each day the drawings are not submitted or revised, or a decrease of the construction build-out period on a day-for-day basis for each day the drawings are not submitted or revised.)
5) What, if any, procedures are in place and/or required if there are material changes to the plans and specifications that were initially approved by the parties?
6) What, if any, procedures are in place and/or required if there are material changes in the initial build-out of the premises from the plans and specifications that were initially approved by the parties?
7) Are there any cross references to collateral documents such as a 'design manual' or 'building guidelines' that are not attached to the lease?
Some economic questions to ask in reviewing a work letter include, but are not limited to:
1) Are there any reimbursements made to the other party for having an architect or engineer review the drawings?
2) Are there chargebacks for storefront barricades? If so, are the costs reasonable? For example, is there a flat fee, or is the cost based on an amount of dollars per linear foot of barricade?
3) Are there chargebacks for temporary utility services to the premises? If so, how are such charges calculated? (eg, on actual use or as a function of cost per square foot of floor area?)
4) Are construction deposits required?
5) Are performance or completion bonds required?
In reviewing the work letter, due consideration should be given to confirming that the scope of work to be performed by the landlord and tenant respectively actually corresponds to the amount and type of work agreed upon by each party's respective business representative. This may require delivery of the work letter to a client's 'construction manager,' which could be a general contractor, architect, engineer or in-house construction department.
Some additional questions to ask in reviewing a work letter include, but are not limited to:
1) Are the utilities services adequately described for HVAC, electric, water, gas, and sewer service?
2) Are there provisions for impact fees or similar fees? For example, utility connection fees (including without limitation all water and sewer connection fees), traffic impact fees, and other extraordinary fees?
3) How are impact fees or similar fees allocated between landlord and tenant? For example, the landlord may be obligated to pay only such fees relative to the scope of the landlord's work and/or the general retail nature of the premises, and the tenant may be obligated to pay only such fees relative to the scope of the tenant's work and/or the specific retail use of the premises by tenant.
Another possible component of a work letter relates to tenant improvement allowances. One problem is that tenant improvement allowances are often referenced in both the body of the lease and work letter agreements. This has the potential to create uncertainties in the aggregate amount of the allowance and/or upon what terms and conditions that allowance shall be paid. Therefore, it would be more advantageous from a lease administration standpoint to have the tenant improvement allowance in just one section of the lease. A review of the work letter should include a determination if the landlord provided additional credits for certain items that the landlord and tenant agreed the tenant would construct. For example, a tenant may receive a credit for the installation of an HVAC unit or the construction of the bathrooms in the premises. The credits should be added to the balance of the tenant improvement allowance to: 1) confirm the aggregate amount of the allowance, and 2) ensure that the credits and allowance will be reimbursed to the tenant concurrently. Further analysis of the tenant improvement allowance would be to determine if the allowance is based on either an aggregate dollar amount or an amount of dollars per square foot of floor area. If the allowance is based on an amount of dollars per square foot of floor area, then the lease should be analyzed to determine if there is a right to verify the measurements of the premises, who has the right to re-measure the premises (landlord, or tenant, or both), and whether the lease contains a procedure to amend those provisions that are based on floor area of the premises (such as base rent, additional rent, pro rata share, and tenant improvement allowance).
It is important to determine if the work letter references other documents used to interpret and/or augment it. One example of this would be references to a 'design handbook' or 'construction design guidelines,' which generally include construction specifications, contact information, and plan submittal criteria. If a work letter includes these types of references, it is extremely important to obtain copies of those documents as soon as possible so as not to delay the preparation of construction drawings.
Memorandum of Lease
A memorandum of lease, or 'short form' of lease, is an executed agreement between the landlord and tenant that is recorded as a matter of public record to provide unrelated third parties with constructive knowledge (if not actual knowledge) of the existence of the lease. The memorandum of lease is important for a number of reasons. The primary reason in a shopping center context is that all future tenants in the shopping center are deemed to have knowledge of the information contained in the memorandum of lease because it is a matter of public record, regardless of whether or not a landlord advises future tenants of such information. The memorandum of lease should include relevant non-economic information to which the leases of the unrelated third parties would be subject. Examples of such information would include the terms of the exclusive use clause from the lease, the length of the lease term, the number and length of any option periods, and references to prohibited and obnoxious uses (examples would be automobile repair operations; 'head shops' or other similar uses; educational facilities; vocational schools or training classes unrelated to a primary retail use; manufacturing or assembly facilities; and adult book stores).
Conclusion
In order to review a commercial retail form lease adequately and completely, an attorney must review it from the cover page to the last page of the entire lease agreement, including all the exhibits attached to the form lease.
Paul Robeznieks is a partner with the Opus Law Group PLLC, with offices in Seattle, Portland, and New York.
In reviewing a draft of another party's form commercial retail lease, much time and effort is expended in analyzing the lease relative to the agreed-upon letter of intent and/or applying a client's leasing parameters into the lease. Many times the signature block is viewed as the proverbial 'goal line,' so if you can make it to the signature block, you are at the conclusion of your review; however, to review the form lease adequately and completely, one must continue the review and analyze all the exhibits attached to the form lease.
There are almost an infinite number of exhibits that one could attach to a lease form; but there are certain exhibits that are more common than others in a commercial real estate context. Among the many types of exhibits that are or could be attached to a commercial retail lease form, the following list is representative of those exhibits that most would agree to be necessary:
1) Legal description;
2) Site Plan;
3) Landlord and Tenant Work Let-ter; and
4) Memorandum of Lease
The question one needs to consider is whether or not the exhibits to the lease supplement the lease or potentially modify the terms and conditions of the lease? In part, the answer to this question will ultimately be of value during the term of the lease when the lease terms and conditions are being administered.
The following is a discussion of the above-referenced exhibits that need to be analyzed as part of a thorough and comprehensive review of a form lease.
Legal Description
Attaching the legal description of the property and/or shopping center is important in a number of significant ways. The legal description of the property is useful to identify the property with certainty because no two parcels of land are ever the same. Additionally, the legal description is effective to verify the landlord's ownership of the property. Moreover, the legal description can be used as a subsequent attachment for the memorandum of the lease, and is relevant as a lender requirement for the tenant's financing of the leasehold interest in the property. In reviewing the legal description, determine if it is ex-pressed in a metes and bounds description or as part of a recorded plat map. Notwithstanding how the legal description is expressed, one should request verification of it from the party that prepared the lease form. This verification can be accomplished by comparing the description to a warranty deed or title report provided by the landlord. The wrong legal description ' or a lease form that does not include the legal description ' can contribute to a host of time-consuming problems in administering the lease.
Site Plan
The site plan is the visual 'road map' of the property and/or shopping center. The site plan will identify the boundaries of the property, locate the specific premises, and identify such items that may be referenced in the lease such as no-build areas, protected drive aisles, outdoor seating areas, drive-through lanes, dumpster/trash locations, relocation areas, co-tenancy areas, visibility corridors, and supplemental exterior signs such as monument and pylon signs. During the examination of the lease, it would be useful to highlight such references in the lease that are shown on the site plan and confirm that such items are in fact clearly and adequately labeled and/or identified on the site plan.
Work Letters
Work letters are perhaps one of the most significant exhibits that can have a direct and economic effect on the value of the leasehold asset and in administering the lease. When reviewing a work letter some procedural questions to ask include, but are not limited to:
1) Who prepares the initial drawings for the construction of the improvements?
2) What are the time periods for reviewing and preparing comments to the construction drawings?
3) What type of specifications do the drawings need to include, eg, the size scale to be used and sample boards of materials and colors?
4) Is there a penalty ' economic or otherwise ' for late delivery of the drawings? (For example, a monetary penalty of $500 per day for each day the drawings are not submitted or revised, or a decrease of the construction build-out period on a day-for-day basis for each day the drawings are not submitted or revised.)
5) What, if any, procedures are in place and/or required if there are material changes to the plans and specifications that were initially approved by the parties?
6) What, if any, procedures are in place and/or required if there are material changes in the initial build-out of the premises from the plans and specifications that were initially approved by the parties?
7) Are there any cross references to collateral documents such as a 'design manual' or 'building guidelines' that are not attached to the lease?
Some economic questions to ask in reviewing a work letter include, but are not limited to:
1) Are there any reimbursements made to the other party for having an architect or engineer review the drawings?
2) Are there chargebacks for storefront barricades? If so, are the costs reasonable? For example, is there a flat fee, or is the cost based on an amount of dollars per linear foot of barricade?
3) Are there chargebacks for temporary utility services to the premises? If so, how are such charges calculated? (eg, on actual use or as a function of cost per square foot of floor area?)
4) Are construction deposits required?
5) Are performance or completion bonds required?
In reviewing the work letter, due consideration should be given to confirming that the scope of work to be performed by the landlord and tenant respectively actually corresponds to the amount and type of work agreed upon by each party's respective business representative. This may require delivery of the work letter to a client's 'construction manager,' which could be a general contractor, architect, engineer or in-house construction department.
Some additional questions to ask in reviewing a work letter include, but are not limited to:
1) Are the utilities services adequately described for HVAC, electric, water, gas, and sewer service?
2) Are there provisions for impact fees or similar fees? For example, utility connection fees (including without limitation all water and sewer connection fees), traffic impact fees, and other extraordinary fees?
3) How are impact fees or similar fees allocated between landlord and tenant? For example, the landlord may be obligated to pay only such fees relative to the scope of the landlord's work and/or the general retail nature of the premises, and the tenant may be obligated to pay only such fees relative to the scope of the tenant's work and/or the specific retail use of the premises by tenant.
Another possible component of a work letter relates to tenant improvement allowances. One problem is that tenant improvement allowances are often referenced in both the body of the lease and work letter agreements. This has the potential to create uncertainties in the aggregate amount of the allowance and/or upon what terms and conditions that allowance shall be paid. Therefore, it would be more advantageous from a lease administration standpoint to have the tenant improvement allowance in just one section of the lease. A review of the work letter should include a determination if the landlord provided additional credits for certain items that the landlord and tenant agreed the tenant would construct. For example, a tenant may receive a credit for the installation of an HVAC unit or the construction of the bathrooms in the premises. The credits should be added to the balance of the tenant improvement allowance to: 1) confirm the aggregate amount of the allowance, and 2) ensure that the credits and allowance will be reimbursed to the tenant concurrently. Further analysis of the tenant improvement allowance would be to determine if the allowance is based on either an aggregate dollar amount or an amount of dollars per square foot of floor area. If the allowance is based on an amount of dollars per square foot of floor area, then the lease should be analyzed to determine if there is a right to verify the measurements of the premises, who has the right to re-measure the premises (landlord, or tenant, or both), and whether the lease contains a procedure to amend those provisions that are based on floor area of the premises (such as base rent, additional rent, pro rata share, and tenant improvement allowance).
It is important to determine if the work letter references other documents used to interpret and/or augment it. One example of this would be references to a 'design handbook' or 'construction design guidelines,' which generally include construction specifications, contact information, and plan submittal criteria. If a work letter includes these types of references, it is extremely important to obtain copies of those documents as soon as possible so as not to delay the preparation of construction drawings.
Memorandum of Lease
A memorandum of lease, or 'short form' of lease, is an executed agreement between the landlord and tenant that is recorded as a matter of public record to provide unrelated third parties with constructive knowledge (if not actual knowledge) of the existence of the lease. The memorandum of lease is important for a number of reasons. The primary reason in a shopping center context is that all future tenants in the shopping center are deemed to have knowledge of the information contained in the memorandum of lease because it is a matter of public record, regardless of whether or not a landlord advises future tenants of such information. The memorandum of lease should include relevant non-economic information to which the leases of the unrelated third parties would be subject. Examples of such information would include the terms of the exclusive use clause from the lease, the length of the lease term, the number and length of any option periods, and references to prohibited and obnoxious uses (examples would be automobile repair operations; 'head shops' or other similar uses; educational facilities; vocational schools or training classes unrelated to a primary retail use; manufacturing or assembly facilities; and adult book stores).
Conclusion
In order to review a commercial retail form lease adequately and completely, an attorney must review it from the cover page to the last page of the entire lease agreement, including all the exhibits attached to the form lease.
Paul Robeznieks is a partner with the Opus Law Group PLLC, with offices in Seattle, Portland, and
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